Column: Charter Communications abuses customer rights, wins approval for big cable merger anyway

Government approval of a merger that creates the second-largest cable and Internet service behemoth in the country is a rich prize that shouldn’t be handed out casually.

So it’s proper to ask why the Federal Communications Commission sat on its finding that Charter Communications flouted customer-service rules until Tuesday, the very day it also approved Charter’s $78-billion merger with Time Warner Cable. And why the FCC slapped Charter’s wrist with a laughable $640,000 penalty, and failed to ensure that Charter would mend its ways in the future.

The issue involves cable modems, those little boxes that allow cable subscribers to connect to the Internet. For cable companies, modems have been a source of almost pure profit; they lease them to subscribers for a monthly fee that continues, essentially, forever, even though the fee pays back the cable firm’s hardware cost within a few months. Time Warner Cable, for instance, charges $10 a month for modems that customers could purchase on their own for $100 or less.

The cable firms used to require these leases, until the FCC ordered them to allow customers to buy and connect their own boxes. The cable companies kept the right to certify outside devices for compatibility with their networks. But because cable modem technology is standardized, that presented no obstacle to customers, who could walk into their nearest electronics retailer, acquire a working unit on the spot and save money.

Except for Charter customers, that is. In June 2012, the company stopped allowing new customers or those switching to new price plans to attach their own cable modems to its network. It would require those customers to remove any that it found operating, and swap them out for Charter boxes.

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That continued until August 2014, when Charter started allowing customers to use their own modems again -- but only modems approved by Charter, which was stingy with its approvals. Of the 22 modems on its approved list, most were “unavailable at major brick and mortar retailers,” complained Zoom Telephonics, a modem maker that said it was shut out -- only six could be found at Wal-Mart or Best Buy, for example. Most also lacked the most advanced Wi-Fi technologies.

The date of the policy change is important: It came just before the deadline for objections to be filed to Charter’s planned takeover of cable systems that Comcast and Time Warner Cable would have to sell to get FCC approval for their own merger. The FCC later killed that deal, but that couldn’t be known at the time. Charter apparently was trying to show that it was a good corporate citizen, to head off obstacles to its own expansion.

Meanwhile, Charter also prevented customers from saving money by acquiring their own modems. Unlike Time Warner Cable and other firms, Charter doesn’t break out its modem fee as a separate bill item, but bundles the modem and Internet service together. The result is that its customers pay the same price whether they own their modems or rent them from Charter, which discourages them from buying their own.

Charter asserted that it was taking these steps to ensure its customers received “the best on-line experience possible” and the most up-to-date technology. Once the FCC got around to investigating -- three years after Charter imposed its restrictions, it found grounds to question those assertions.

Although the law allows cable operators to block connections of customer hardware only where the devices could harm the network or be used to steal services, Charter imposed limits that had nothing to do with “harm to the network or theft of service,” the agency concluded.

Its punishment, as outlined in a consent settlement released this week, deserves a prominent place in the annals of corporate wrist-slapping. The $640,000 penalty is barely a rounding error on Charter’s books -- it comes to about 18 minutes’ worth of revenue for the merged Charter/Time Warner Cable, which will be collecting about $18.6 billion a year. (The deal also involves the acquisition of the much smaller Bright House Network.)

Charter will have to allow the connection of any cable modem that meets common industry standards; it can test new models but can’t take longer than three weeks to do so. But Charter will be permitted to continue discouraging customers from buying their own modems. The FCC declined, either in its consent settlement on the modem issue or in the terms of the merger approval, to require the company to break out its cable modem fee or give customers a discount for bringing their own. Indeed, Charter says it plans to extend to Time Warner Cable and Bright House customers its policy of bundling the modem and service fees invisibly together. (Those customers can keep their old plans as long as they wish, it says.)

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The FCC seems to have bought into Charter’s claim that its bundling is a boon to consumers, because its Internet rate is cheaper than the other cable firms’ Internet and modem fees taken together. On the surface, this makes it appear that customers are getting their modems for free. But it overlooks the obvious fact that subtracting the cost of the modem would make customers’ bills lower still. The basic problem is that Charter customers still don’t know what the company is implicitly charging them for the hardware.

Oddly enough, the FCC recognizes that this is a genuine customer-service issue, because it’s already taking comments on a proposed rule to require separate billing. For some reason, the agency decided against imposing the rule on Charter when it could, despite evidence that Charter has used its lax regulation to its own advantage. If this is a harbinger of how strictly the FCC will be keeping an eye on the second-largest cable firm in the country after attending at the giant’s birth, Charter’s new customers will be feeling the pain.

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